Unpacking UK tax reliefs – a series
Number Two: Entrepreneurs’ Relief
In the second in a series of articles on the key tax breaks designed to encourage investment and entrepreneurial activity in the UK, Vivian Haines considers Entrepreneurs’ Relief.
Entrepreneurs’ Relief (ER) cost the UK treasury £2.7 billion in lost revenue in 2017-2018.
In light of a report published by the Institute of Fiscal Studies, which concluded that entrepreneurs will take a risk and set up a business with or without a tax break, the Government concluded that the tax savings available were too costly to the Exchequer. Accordingly, in this year’s Finance Bill, the relief under ER was significantly restricted.
Before 10 March 2020, an individual (or in some cases a trustee) could reduce their Capital Gains Tax (CGT) rate from 20% to 10% on qualifying disposals, provided that the capital gains were within a taxpayer’s lifetime allowance of £10 million. ER therefore offered a potential tax saving of £1 million.
From 10 March 2020, the lifetime allowance has been reduced to £1 million, meaning that the available ER tax saving is now only £100,000 (£1 million * (20%-10%)).
This is, of itself, too small a relief to encourage entrepreneurial activity. However, when combined with other reliefs, it is still worthy of consideration:
- Spouses each have an ER allowance, so provided both are employees or directors of the relevant company, the combined ER available tax saving for couples is £200,000;
- ER can also be combined with:
- Business Investment Relief (BIR) – tax-free remittances into the UK (the next relief looked at in this series);
- Deferring capital gains that arise on the disposal of shares that qualify for ER into shares that qualify under the Enterprise Investment Scheme (EIS); and
- Reducing an individual’s Inheritance Tax (IHT) exposure by investing in shares which qualify for ER and Business Property Relief (BPR).
Read the first in our Unpacking UK tax reliefs series – Number 1: Investors’ Relief
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